Budgeting:  How to Develop a Budget

Now that you've explored ways to reduce both your variable and fixed expenses, it's time to develop a monthly budget.  Doing this will help you control your spending, find out where your money is going, and develop a plan to pay off your debt (except your mortgage loan) within the next five years.  Now, developing a budget doesn't mean that you have to stick rigidly to a spending schedule and never vary from it.  Developing a budget means that you are going to try and save X amount for retirement, try to spend X amount for groceries, etc.

The best way to develop a budget is to use money management software, such as Quicken or Money or a simple notebook. 

Budget Planner:  Income Worksheet
Budget Planner:  Expense Worksheet
Budget Planner:  Expense Worksheet (blank)

Don't forget to use our calculators to determine what the best option is for you.  Some of these calculators will let you print out personal schedules and statements.  Visit the calculator section of this website to see all 53 calculators.

When you develop a budget, make sure that it is a livable one.  In otherwords, don't set amounts you need for food and other necessities very low just so you can pay debt off faster.  By livable, we mean a budget you can realistically stick to.  This means that your budget should provide for the following:

(1) Pay all of your secured creditors first (house, car payment, and other collateralized assets). 

(2) Set realistic estimates of what you need for your monthly living expenses, such as food, utilities, fuel, etc. 

(3) Set aside amounts for an emergency fund.
The Millionaire Next Door

"The Millionaire Next Door" is the title of a best-selling book published many years ago.  The book was the result of research on how everyday people became wealthy, and outlined the habits of self-made millionaires (those with a net worth of at least $10 million).  The book revealed the fact that self-made millionaires are frugal and tend to live simple lives. Contrary to the way they are portrayed in the media, the typical self-made millionaire is not a doctor or lawyer; he is a self-employed person who works at least 60 hours a week in his own small business.  He might run a very unglamorous business, such as an automobile junkyard or a pluming company.  He (yes, most are men) also drives a six-year old vehicle (the most popular, a Ford pick-up); does not accumulate debt; shops for bargains; lives in a home well below his means (upper middle class); and invests his money in mutual funds and other types of relatively safe investments and watches his money grow over time.  The typical millionaire is not interested in "keeping up with the Jones'."  They don't own 100 pairs of shoes or a late model, expensive car.  They don't buy designer clothes or spend $100 for a haircut.  His neighbors and friends would never guess he was a millionaire unless he told them.

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(4) After you've decided what amount you need to cover all of your fixed monthly bills and living expenses, divide up what income you have left among your unsecured creditors.  Hopefully, you have enough to pay them all and then some left over to pay off credit card debt and start a savings plan.

If the budget you develop does not free up enough of your income to pay off your excess debt (excluding your mortgage) in a reasonable period of time (no more than five years), or you are still over your head in debt or on the verge of financial collapse, then you must consider other alternatives, such as bankruptcy, credit counseling, or debt negotiation.

Learn to be more frugal.  One of the biggest reasons Americans are in so much debt is their tendency to live beyond their means and want to buy expensive, name brand items and enjoy the good things in life.  But the problem with this is that Americans' rate of pay hasn't kept up with inflation or the very high cost of living in the United States.  You have to be more frugal with your money and stop wanting things you can't afford.  Most self-made American millionaires are very frugal people, living a modest life in relation to their wealth.  Read the article in the blue box below for more information.

Next section:  Budgeting Worksheets
Most importantly, the typical millionaire develops a budget and financial plan and sticks to it religiously.  If you want to have real wealth instead of the appearance of wealth, stop spending your money on things designed to impress other people, and adopt the habits and values of those who are truly rich.  Develop a realistic budget and stick to it. Your ultimate goal is to start saving as much money as you possibly can and investing it wisely. Over time, you will get out of debt and start building real wealth.  Visit our Ways to Save Money section for dozens of ideas on saving lots of money.